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Paulson: Road to Market-Driven Yuan Will Be a Long One

U.S. Treasury Secretary Henry Paulson said that some agreements made in recent economic talks with China will help create the basis for moving towards a market-determined currency exchange rate, but stressed the effort was a long path of small steps.

Defending the limited progress made in last month's "strategic economic dialogue" talks with top Chinese officials, Paulson said some agreements in the financial services sector such as easing restrictions on new foreign securities firms would help expand opportunities for American companies.

"The dialogue is an on-going process. To get results, we must build relationships and take smaller, deliberate steps forward together to create momentum for greater change," he said in prepared remarks to a conference sponsored by the Heritage Foundation in Washington.

Although the dialogue did not produce any breakthroughs on the key issues of increasing foreign ownership caps on Chinese banks and other financial institutions, Paulson said new air services agreements announced then would help stimulate some $5 billion in new business for U.S. airlines.

Paulson reiterated that he has pressed the Chinese to increase the flexibility of their yuan exchange rate in the short term and move to a market determined exchange rate in the medium term.

But he said the managed yuan exchange rate was not the sole reason for the massive U.S. trade deficit with China.

"The Chinese have taken some steps, and they can do more. While currency reform is not going to eliminate our trade deficit, a market determined exchange rate that reflects the underlying fundamentals of the Chinese economy is one component of the actions needed to address imbalances," Paulson said.

The other key factors include gearing China's growth away from exports and towards domestic consumption, as well as reducing the high precautionary savings rates among Chinese people, he said.

Paulson said that ahead of the third strategic economic dialogue in December, the Bush administration will actively work on the China trade agenda, on opening Chinese markets, increasing transparency and innovation, rebalancing growth and promoting energy efficiency and environmental protection.

He said he would continue to focus on financial services, on Beijing moving at a faster pace towards a market-driven currency and expanding U.S. access to the services sector.

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